CHARLIE MUNGER: Energy Independence Is A Dumb Idea

Add Berkshire Hathaway Vice-Chairman Charlie Munger's name to that list.

Munger recently spoke at the Committee of 100 U.S.-China relations conference (via Farnam Street Blog's Shane Parrish notes and Tim Harford).

The moderator asked Munger a basic question about which sectors Berkshire believes are ripe for growth.

He responded by begging off that question and launched instead into a critique of America's energy policy, especially the continued insistence on independence.

But unlike other commentators who've refuted the concept, Munger approached the question from a more apocalyptic angle:

Here's Parrish's transcript:

If energy independence was such a good thing, let’s just imagine that we go back to 1930 or something like that and we were hell bent to have total energy independence from all the foreigners. And we just drill and use every technique we can and we produce our hydrocarbon reserves which are absolutely certain to be limited.

Well, by now have way less in reserve and are way less energy independent. In trying to get energy independence we would have destroyed our safety stock of oil within our own borders.

Oil and gas are absolutely certain to become incredibly short and very high priced. And of course the United States has a problem and China has a worse problem.

And China has the correct solution. Imported oil is not your enemy it’s your friend.

Every barrel that you use up that comes from somebody else is a barrel of your precious oil which you’re going to need to feed your people and maintain your civilization.

And what responsible people do with a Confucius ethos is they suffer now to benefit themselves, their families, and their countrymen later. And the way to do that is to go very slow on producing your own (domestic) oil. You want to produce just enough so that you keep up on all of the technology. And don’t mind at all paying prices that look ruinous for foreign oil. It’s going to get way worse later.

Every barrel of foreign oil that you use up instead of using up your own — you’re going to eventually realize you were doing the right thing.

Energy is one of the unique areas, he continued, where free-market policies end up causing more problems than they solve. In the case of energy, he said, governments should step in and encourage imports (it should be noted, of course, that this situation already partially exists, since exporting U.S. crude has been banned since the '70s):

Why are the policy makers in both countries so stupid on this single issue because they are not stupid generally? I think that it’s partly the economists who have caused the problem. Because they have this theory that if people react in a free market that it’s much better than any type of government planning but there is a small class of problems where it’s better to think the things through in terms of the basic science and ignore these signals from the market.

Now if I’m right in this, there are a whole lot of lessons that logically follow:

(1) Foreign oil is your friend not your enemy; (2) You want to produce your own assets slow; … (3) The oil in the ground you’re not producing is a national treasure; … running out of hydrocarbons is like running out of civilization. All this trade, all these drugs, fertilizers, fungicides, etc. … which China needs to eat with a population so much, they all come from hydrocarbons.

And it is not at all clear that there is any substitute. When the hydrocarbons are gone, I don’t think the chemists will be able to simply mix up a vat and there will be more hydrocarbons. It’s conceivable, of course, that they could but it’s not the way to bet. I think we should all be quite conservative and we should pay no attention to these silly economics and politicians that tell us to become energy independent.

So what should we be doing instead?

Munger believes we ned to shift resources away from producing whatever is left in the ground and save it for his purported day of reckoning.

Rather, we should be investing in all the other forms of energy out there:

We have a brain block on this issue. We should behave now to do on purpose what we did by accident: we conserved some of our oil because we were not aggressive enough and smart enough to get it out faster, that was accidentally doing the right thing. Now we should do on purpose what we formally did by accident. We should conserve and subsidize new forms of energy … we should suppose these big national grids.

Here's the full clip. The energy part starts around 37 minutes: